Non-Compete Cases and Choice of Law: A Recent Case From Missouri

A recent non-compete case out of Missouri raises a number of interesting considerations, including some related to choice of law and conflicts of law.   The case is TLC Vision (USA) Corp. v. Freeman, 2012 WL 5398671 (E.D. Mo. Nov. 2, 2012).

TLC is basically in the business of running centers that provide vision correction services.  TLC is a Delaware company with its principal place of business in Missouri.  Apparently, TLC does a good deal of business in Oklahoma.  To make a long story short, a group of former TLC employees in Oklahoma (Freeman et. al.) got together and formed a new company called NJoy Vision!, LLC.   As it turns out, these were not just any former TLC employees.  The folks who formed NJoy Vision are former vice presidents, directors and managers of TLC (i.e. high ranking TLC insiders).  As expected, these folks all had non-compete agreements.  As expected, TLC sued.  The Court ruled in TLC’s favor and granted it a sweeping injunction.  The decision is noteworthy for a number of reasons.

First, in ruling for the Plaintiff, the Court went far beyond what one would reasonably expect in a case like this.  TLC succeeded in obtaining an injunction that effectively shuts down NJoy Vision.  The individual defendants and their company were ordered to stop competing, period.  This is a drastic remedy and one that is unsupported by the record.  The court dedicates all of a single paragraph to an actual analysis of the merits of the non-compete case.  Its analysis is superficial at best.  In short, the Court concludes that the defendants signed a non-compete agreement, that they could steal customers, that they could use their knowledge of TLC’s operations and that this is enough.  Injunction granted.  Wow.  Stay out of Missouri.

I have read many recent non-compete cases where the court takes a hard look at the legitimate business interest in question.  For example, there are a number of recent cases where courts really scrutinize claims regarding valuable, confidential information.  This is not one of those cases.  The court seems to have taken those claims at face value.  Beyond that, the court seems to have had no interest in fashioning a less restrictive injunction.  Sure, it is perfectly reasonable to enjoin NJoy Vision from soliciting TLC’s clients.  Sure, it is perfectly reasonable to tell NJoy Vision (and its principals) to return any materials or documents they took with them.  But shut them down, completely?  That does not seem necessary.

Also, in hastily disposing of the non-compete analysis, the court made some very bad law.   Take, for instance, the issue of suppliers.  In most states, the non-compete statutes include customers as a legitimate business interest.  But what about suppliers?  Suppliers are logically and analytically distinct from customers.  Suppliers often supply many businesses in a given industry.  Supplier relationships are not unique or singular.  As a result, supplier relationships cannot be protected by non-compete agreements.  This issue has repeatedly been litigated in Florida and the courts have gotten it right every time.  See, e.g., Concrete Surface Innovations, Inc. v. McCarty, 2010 WL. 1930971 (M.D. Fla.); Bradley v. Health Coal., Inc., 687 So. 2d 329, 334 (Fla. 3d DCA 1997).  The rationale articulated in these cases is sound.  But in the TLC case, the Eastern District of Missouri got it dead wrong: The court barred the defendants from interfering with TLC’s supplier and vendor relationships, essentially treating these relationships as if they were protectable business interests.  And the court did so without giving the matter a second thought.  Now, going forward, the TLC case will be cited for the absurd proposition that supplier or vendor relationships constitute a legitimate business interest and can justify a non-compete agreement.

Now for the interesting part: The case is being litigated in Missouri, under Missouri law, pursuant to a contractual forum selection clause and a choice-of-law provision.  But all of the action took place in Oklahoma.  The competitive fight is in Oklahoma.  All of the defendants are in Oklahoma.  NJoy vision is based in Oklahoma.  This is significant because employee non-compete agreements are generally unenforceable under Oklahoma law.  Further, the case involves centers that provide vision correction services.  This is a medical service.  The folks providing that service are doctors— doctors who specialize in refractive surgery.  Where is this going?  Well, it stands to reason that Oklahoma might have a significant interest in this dispute.

Granted, the parties agreed to a Missouri forum and Missouri law.  But contractual choice of law is not always dispositive.  Instead, the test is whether applying that choice of law provision would create a result that is contrary to the public policy of a state with a materially greater interest in the issue.  See, e.g., Daimler-Chrysler Corp. Healthcare Benefits Plan v. Durden, 448 F.3d 918, 924 (6th Cir.2006).  Here, Oklahoma has a materially greater interest than Missouri in the case and its consequences.

Missouri’s interest?  The plaintiff TLC had its principal place of business in Missouri.  After that, maybe there is some generalized Missouri interest in enforcing contracts.  But look at the other side of the ledger.  The defendants are all in Oklahoma.  The parties are fighting over Oklahoma turf.  The case implicates competition in Oklahoma and the rights of consumers in Oklahoma.   Further, the case implicates the right of patients in Oklahoma to obtain medical treatment from a doctor of their choosing.  In terms of public policy, the case implicates (and contravenes) Oklahoma’s public policy against non-compete agreements.  On balance, Oklahoma has a greater interest at stake.  But the TLC Court was unconvinced.  Just like in every other part of its decision, the court quickly resolved the choice-of-law issue with no real analysis, concluding, “There is no indication that Missouri lacks all interest in the transaction or that Oklahoma’s interest in the matter is materially greater than Missouri’s.”  2012 WL 5398671 at *5.

The biggest issue here is not necessarily the outcome—- it’s how the court got there.  This is a lazy, poorly reasoned decision and will likely make it harder for those who defend non-compete cases in Missouri.